Study of the Need for a Materials Management System

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REDISTRIBUTION WAREHOUSES Name of Department Warehouse Space Total Value Total Number or Division Citl in Square Feet Inventorl of Items Highways * Sacramento 78,120 $1,727,749 3,690 Highways * Los Angeles 72,200 1,405,397 3,760 General Services Sacramento 51,000 1,143,096 2,007 Motor Vehicles * Sacramento 47,940 386,000 1,879 Employment * Sacramento 32,207 500,000 2,515 General Services City of Industries 30,366 490,904 2,007 Water Resources * Sacramento 25,000 225,000 2,229 Highway Patrol * SacrSloento 19,980 500,000 1,929 Social Welfare * Sacramento 14,500 121,500 2,360 Forestry ** Redding 14,070 100,000 1,071 Equa liza t ion * Sacramento 10,800 121,000 1,390 Forestry ** Monterey 9,570 50,000 763 Forestry ** Santa Rosa 9,300 100,000 986 Forestry ** Sacramento 9,288 28,506 955 Forestry ** Riverside 8,500 90,000 970 Forestry ** Fresno h~OO ~ ~_4Q~QQQ 873 TOTALS 440,341 $7,029,152 29,384 * Recommended for integration into Department of General Services centralized warehousing program. ** Recommended for Major Reduction or Abolishment. Number of Distribution Points 300 300 360 149 365 300 13 100 131 13 68 10 14 12 13 11 2159 EXHIBIT I > "tI "tI ~ :z: c ~ >< > - n 0 ::s 1"9 . - APPENDIX A (Cont.) a b c d e Number of Locationl* Facilitiel allociated with inltitutional operationl (holpitall, prilonl, collegel, Ichools, etc.) Facilitiel alsociated with Ipecial purpose material lupport to remote located operations (Fire fighting, construction, parks and etc.) Urban facilities allociated with large complexes of office type activity Facilities lupporting Ipecial maintenance and repair facilitiel Facilitiel allociated with non-urban field office 81 181 47 58 activity (CHP, DMV, Employment) 263 630 Size in S9. Ft. 1,366,334 653,260 194,974 192,678 118,893 2,526,139 EXHIBIT 11 Eltimated Inventory Value $11,531,858 $ 5,513,514 $ 1,645,580 $ 1,626,203 $ 1,003,457 $21,320,612 * State agencies operate 1473 separate Itorage facilities, many of which are at clolely adjacent locationl. For purpole of thil report, luch multiple facilitiel operated by one department at a lingle location are combined and conlidered alone "warehoule" or "Itockroom". C. Current Inventory Management Methodl The State does not have any overall plan, IYltem or uniformly applied procedures designed to minimize both expendable goodl inventory invelt- ment and related operating cOltl. With lome encouraging exceptionl in the Department of General Servicel, HighwaYI and Employment and in inltitutional feeding programl, regularly produced inventory data il deligned primarily to an.wer the queltion "what did we Ipend our money for?" rather than to produce management control data on inventory inveltment. Agencie. can generally identify the total amount of money expended for expendable goodl, but the Itudy team found limited evidence that the traditional management questionl of inventory control relating to on-hand stock (units and dollarl), volume and purpose of usage, turn- over rate, co.t of owner.hip, etc. are being a.ked or answered by State agencies. The mOlt conliltent deficiency in inventory management practicel il the absence of policiel or procedure I which clearly identify agency manage- ment'l relponlibility for effective inventory management. The only -7- .. APP[NDIX A (Cont.) statewide policy statements found on the subject of expendable goods inventories appear in SAM 8652, Property Accounting and 10800-10890, Institutional Stores Accounting. This latter section relates only to General Fund supported institutions with resident populations. Even in this limited context, stock records are maintained only for goods dir- ectly related to inmate care. Little attention is given in the State Administrative Manual to controlling or managing expendable inventories or providing management standards for inventory control. As a result of this policy vacuum, the key decision affecting inventory investment (i.e. what is stocked in warehouses, the establishing of re- order points, total dollar Lnvestment, etc.) have generally evolved onto the lowest employee leveh, In addition, the study team found that only in a few instances were the results of these key decisions (average inventory investment, turnover, costs, service level, etc.) receivit~g &r.V' kind of management review. Other indications of the gen0'ral absence of a ser:se of management: respon- sibility for expendable goods inventory operations 15 the inconsistency in the taking of physical inventories. Consistent annual physical in- ventories are taken covering only about $12.000,000 of the $28,350,000 inventory identified. In several other units bi-annual physical inven- tories are taken. In general. however, probably less than 50l of the State's expendable goods inventories are consistently subjected to reconciliation with book inventories. This is not particularly surprisin~ since accurate stock records adequate for a reconciliatinn are currently required by the State Administrative Manual only for institutions financed by the General Fund and having resident populations. In the majority of interviews, agencies were unable to readily produce current or accurate information on inventory contents, value. turnover. shipments. or operating costs. or provide a clear statement of reorder policies or practices. Based on information developed hy the study team. however, the following general observations are possible. Stock Status - It appears that aggregate stocks equal to at least 6 months of usage are being held in various levels on inventories in the State. Turnover - It is unlikely that a turnover rate substantially exceeding 2.0 is being achieved by any but a few very active facilities. The overall State average would probably fall in the range of 1.50 - 2.0. Reorder Policy (Investment in Stuck} • The establishing of minimums and maximum stock levels appears to be largely left to the discretion of lower level storekeepers and stock clerks. As a result. widely varying practices were found. One of the most common was directly related to the quarterly purchase cycle in which the minimum quantity was roughly the equivalent of one quarter's usage and maximum quantity represented roughly two quarters usage. Since, at best, this system could produce a turnover rate of 2.5 (and usually a considerable lower rate due to the tendency to hedge quantities upward), such a common practice results in an inventory investment of aa much as double that required. It is interesting to note that, despite this unnecessarily large invest- ment, agency warehousing personnel quite typically complained of their -8- APPENDIX A (Cont.) inability to avoid ".tock outs". This is the caa.on result of the ab.ence of a sy.tem which is not based on accurate unit records and cannot correctly take into account variation. in usage patterns in e.tabli.hing reorder point. (too much of what you don't need and too little of items required). 1>. SU1llllary With a few notable exceptions, the State i. not effectively managing it. investment in expendable good.. Nowhere is thil management phi- lOlophy more clearly in evidence than in the State Adminiltrative Manual Section 8652 which dismi.ses expendable property al that which has a unit COlt of le88 than $25.00 and, al such, doel not have "suf- ficient value to merit item control" and is of "a nature that makes formal property accountability impractical". It is reasonable to lay that agency managers do not. 8S a rule, feel accountable for the size of their inventories or the costs created by them. The study team finds this attitude difficult to understand. Roughly 501 of the State'. $140,000,000 annual expenditure for materials, .upplie. and equipment is for expendable goodl. All of these items are, at lome time or place, stored before conlumption, creating an additional annual cost of approximately $8.7 million. Over $30,000.000 of State fundi are continuously tied up in expendable good. inventorie.. Thi. area of material. management cannot continue to be ignored or written off as too "expen.ive to keep track of". The study team concurl with the Governor'. Ta.k Force that, under effective management, both the State'. average inventory inve.tment and co.t of owner.hip could be lubstantially reduced. To that end, the following recommendation. are made as the beginning steps to achieve a statewide expendable goods inventory management program. II Recommendation. for Short Range Actionl (Resultl Achievable in 1-12 Monthll Since the State generally doe. not uniformly maintain unit stock record. for expendable goodl, u.age information necellary to arithmetically e.tablilh correct quantities for Itorage is not available to either the Itudy team or agency management. Short range actions to reduce inventoriel, therefore, mUlt dppend largely on administrative directivel and inten.ive screening of expendable goods purchalel. In private indultry, it is generally accepted that "ownership" of goodl (warehou.ing, handling, record keeping, etc.) increase. co.t of good. from 1St to 251 each time it il handled. In some State agencie., expendable goods are pa •• ing thr~g~a. many al four levels of warehou.e handling before being consumed (i.e. Central Store. to agency redistribution ware- hou.e to "district" warehoule to local stock room). The unnece •• ary handling nearly doubles the actual co.t of goods in some in.tances. In addition, State inventories at all levels frequently duplicate inventoriel maintained by .uppliers able to deliver to the point of use on a timely basil. We, therefore, recommend several immediate actions to reduce this mUltiple handling and the unnecessary duplication of supplier inventories and to identify exi.ting .urpluses of expendable goods. -9- APPENDIX A (Cont.) 1. Request the Governor to issue a general policy statement on statewide inventory management. Exhibit III is a propoaed draft of such a general policy statement. Thia general policy statement will establish the framework in which actions by the Department of General Services to reduce on-hand stocks can be taken. 2. Require agencies operating storase facilities to conduct ~l!ical inventory of such stocks (except for sto~!-!hic~ a physical inven- tory hal been taken within the previous 12 montha) and-!!E0r~~rplus to the Office of Procurement. Such surplus stocks. once identified. may be usable by other State agencies. If the Office of Procurement has a record of existing surpluses of expendable goods against which to screen agency purchase requests, it may be possible to effect interagency transfers or sales in 1 Leu of the purchase of additional supplies. The study team is. however. realis- tic enough to anticipate that no large amounts of surplus will be "found" by State agencies and probably only limited stock transfers will be achieved. The immediate value of requiring agencies to conduct inven- tories and seek out surplus will be to alert agency managers to the size and value of their inventories and equip them to report information needed by the Office of Procurement to establish contracts for expend- able goods which rely on supplier inventories rather requiring large stocks be maintained in State inventories (see recommendation 13). 3. Require the Office of Procurement to screen all purchase estimates for expendable soods ~ndt where possible. establish local purchases con- tracts for such goods ~hich rely on supplier inventories. Many items now maintained in agency inventories in quantities equivalent to a 90-180 day supply are readily available from suppliers able to deliver to the point of use without substantial price increase or delay, In such instances, State inventories unnecessarily duplicate those main- tained by local suppliers. We recommend that agencie. submitting purcha.e reque.ts for expendable goods to be maintained in inventory storage be required to show on the purchase estimate the following information: That the ordered goods are .regularly maintained in inventory stocks. The average or estimated quantity required for a 6 to 12 month~~. The minimum delivery lead time re~ired by the ase~c~. The Office of Procurement will accept the purchase estimate as authori- zation to establish contracts with suppliers to fill such needs. Such contracts will provide for simple and direct ordering by the agency from the supplier at predetermined prices and/or discounts but limit such orders to quantities not exceeding a normal 30 day supply. Such con- tracts will also stipulate that items covered by the contract may not be maintained in inventories in quantities exceeding a normal 30 day supply. Office of Procurement will assume expendable goods purchases for which a delivery lead time of less than 3 days is unacceptable or "contingency" stocks maintained in inventory at all times to meet emergency needs -10- APPENDIX A (Cont.) iLnvolving the protection of public health, safety or welfare. Purcha.e nquests for auch contingency atock ahould be accompanied by a de.crip- tion of the anticipated emergency, the probable conaequence of not having replacement atock illlllediately on-hand and the quantity of atock l:lormally required to meet such emergencies, .0 that the ordering agency tMnagement recognize I it il creating a continuing inventory co.t and lreviews the validity of doing 10. Thil inforaation will allo permit the Office of Procurement to eltablish lupplier contract •• peciflcally designed to meet the crish needs auociated with these expendable gooda. '~e recommend that such purchase estimates for "contingency" stocka be reviewed and approved by the chief administrative officer of the depart- Inent, institution or college or an appropriate managerial peraon to which this approval authority has been delegated. 'rhe Office of Procurement will actively screen such "contingency" aupply requests and isolate those requests which appear to be unjuatified. :Such requesta will be returned to the ordering agency for re-evaluation. 8y requiring agencies to prnvide such information, the Office of Procure- Inpnt will be able to convert many such expendable goods purchaae requea~s from stocks held in storage to contract purchases relying upon aupplier inventories. Within 12 months agenciel will then have the opportunity to reduce or eliminate continuing inventories of goods available, under such contracts, from local suprliers. Exhibit IV is a suggested manage- ment memo on this subject. ·~e estimate that if this procedure 11 actively pursued, a $4-5 million inventory reduction can be achieved in a period of 12 months. 4. .Require agencies, when ordering supplies from the Department of General .Services, Central Stores , to have luch commodities delivered directly to the facility nearest the point-of-use. Exhibit V is a suggested State Administrative Manual reviaion on this subject. This policy will substantially reduce multiple and unnecea- sary handling of goods available from the Department of General Servicea, Central Stores. It trlUlt be noted that reduction of on-hand inventories does not automatically reduce the State's continuing related operating costs. A half-empty warehouse costs substantially as much to operate as does a full one. Corollary reduc- tions in warehouses, staff and equipment must be made by individual agencies to achieve an effective inventory management program. Section III of thia report includes actions to substantially reduce these operating costs and must be aggreSSively implemented to accomplish the overall savinga envisioned by the Governor's Task Force. -11- APPENDIX A (Cont.) III Recommendations for Lon~rm Materials Management {!2 - 36 Months} The State faces several basic problems in permanently reducing inventory cOlts (1) overcoming the current management apathy toward inventory manage- ment (2) duplicate inventories in redistribution warehouses and (3) over- stocking at point-of-use facilities. The study team, therefore, makes two basic policy recommendations followed by a series of recommended actions neceslary to implement these longer term policies. 5. The Department of General Services act as the central warehousing program for the State and the eight redistribution warehous~E!0grams operated by agencies other than the Division of Forestry be transferred to the Department of General Services. (See Exhibit....ll The eight redistribution warehouses maintain inventories duplicating those at point-of-use. Operating such overlapping warehouse programs not only represents an uneconomic use of inventory funds ($5,000,000), man- power (148 positions), equipment (86 pieces) and space (300,000 sq. ft.) but also results in the shipments from these warehouses to virtually identical locations being split into uneconomically small and multiple units. (Map B) The inventories maintained in these facilities alr~ady contain substan- tial amountl of items obtained from the Department of General Services, Central Stores (see Exhibit VI). In addition, a number of items in these warehouses purchased from non-stores suppliers appear to be sub- stantially similar and, therefore, unnecessarily duplicated because of the mUltiple inventories. We estimate the total operating costs of these eight agency-operated programs to be at least $1,500,000 annually exclusive of freight on outbound shipments. Integration of these eight facilities into a centralized warehousing program will produce savings in several ways. Operating COltl - We estimate that an integrated warehousing program can reduce space required from 300,000 sq. ft. to less than 200,000 sq. ft. and staff from 148 to less than 80 positions. This would result in an annual savings of at least $700,000. Inventory Reduction - Average inventory investment in these eight pro- grams can be reduced from $5,000,000 to $2,500,000 for an annual savings of approximately $100,000 ($2,500,000 at 41.). Freight Costs - Based on total shipments from the warehouses of about $10,000,000 annually, current freight costs are $500,000 to $600,000 annually. This coat can be reduced at least 201. or $100,000 by freight consolidation8 from integrated facilities (see Map B). The study team i8 confident that such an integrated central warehousing program can result in annual savings of at least $900,000 and a one-time net inventory reduction of at least $2,500,000. Implementation of an integrated central warehousing program requires the following basic actions in the general sequence in which they are listed: -12- APPENDIX A (Cont.) 6. ~stablish within the Department of General Services an ADP based 1lnventory control system capable of accommodating up to 50,000 line Hems. -- 1'0 attempt to operate an integrated warehousing systetl can succeed I1nless adequate management control syste.s exist to both handle large :lnventories and produce forecasU and related control data necessary Ito reduce inventory investment. An integrated program as recommended Ilbove would have to accommodate a total inventory investment of about :~4,000,000 and between 20,000 and 25,000 line items shipping to about 1,000 points throughout the State. Such an ADP aystem would cost at Least $100,000 annually. Such a system has, as a basic ingredient, the adoption of standard Inomenclature and commodity coding similar to and based on the Federal GSA system. This step is already nearing completion of its design and .application to expendable good. in the Department of General Services, '::entra 1 Stores program. l,01e are informed that implementation of such an ADP system, including design, programming and trial periods, would require at least one full lnan-year assuming one of several available software programs (e.g. Honeywell "Profit", IBH "Impact", etc.) were used. We also are informed that originally designed systems would require at least twice to three times as many man-years to implement. 7. .Re-engineer existing Department of General Services warehouse program .systems and methods to acceE!-l4rger and more complex warehousing .activity. The present Department of General Services, Central Stores, program is not adequately effective in such areas as stock handling, space and manpower utilization and shipping consolidation to accept management of substantially larger inventory responsibility. The service. of a quali- fied industrial engineering consultant are required to establish effective stock handling methods and standards for full utilization of manpower and space. Exhibit VII shows the sequence of actions required to prepare the Department of General Services, Central Stores, program for operation as an integrated centralized warehousing activity. 8. Augment the Service Revolving Fund in the amount of $2,500,000 to fund a centralized inventory. This $2,500,000 additional Service Revolving Fund allocation will be required to fund the inventories required in the recommended centralized integrated warehousing programs. The inventories of the eight agency programs recommended for integration are funded from variou. source., other than the Service Revolving Fund. In a majority of programs, funds used are essentially the operating expense allocations for supplies of the parent department •• This $2,500,000 additional capitalization of the Service Revolving Fund is in lieu of the $5,000,000 now continuously required to fund the aggregate inventories of these eight agency-operated redistribution programs. -13- APPENDIX A (Cont.) 9. Achieve orderly tranafer of the.e eight agency-operated wareh,?ul1ng program. to the Depar~ent of General Services includins reguired .taff, equipment and facilit!!!-(see Exhibit Il. The.e programs .hould be tran.ferred, one at a time, to the Department of General Service. at 60-90 day intervals to permit the .mooth tran- sition to a centralized program. This transfer should begin only when the Department of General Services, Central Store. program has developed both the ADP and operating capabilities described in recommendations #7 and 8 above. Assuming that the Department of General Services, Central Stores, achieve. the required capabilities described above by 12/1/68. we recommend that these programs be integrated in the following order: 1. Department of Water Resources - 12/1/68 2. Board of Equalization - 2/1/69 3. Social Welfare - 4/1/69 4. California Highway Patrol - 7/1/69 5. Department of Motor Vehicles - 10/1/69 6. Employment - 1/1/70 7. Division of Highways, Sacramento - 3/1/70 8. Division of Highway., Los Angele. - 7/1/70 10. Establish a statewide program for effective manasement of agency-owned expendable good. inventories. The State'. current policy on inventory management of expendable goods is largely one of "abstinence." The Department of General Service •• through it. uniform accounting system, .hould require departments maintaining point-of-use inventories to (1) maintain adequate ba.ic inventory control stock records and (2) identify and report both inven- tory inve.~ent and cost of owner. hip information. In addition, the Department of General Services must develop and enforce general .tandards for agency inventory management including. at lea.t. space and manpower utilization standards for warehou.ing operation. and general .tandards for levels of inventory investment. The following are specific action. required to implement such a policy: 11. Establish, in the State Administrative Manual, a basic Statewide inventory management policy, to be au~ented by individual~~ and require that the responsibilit~r inventorI-manasement within in~dual asen- cies to be specifically assigned to an accountable-2!!~~ositio~. Exhibit VIII is an outline of a recommended general State inventory management policy. Within the framework of this policy. individual agencies should develop their own specialized policies and procedures for effective inventory management. The responsibility for achieving effective inventory management must be clearly identified a. an area for serious and continuing management concern. Funds budgeted for expendable goods cannot be considered simply an unavoidable cost of doing business but must be tightly managed and controlled. -14- APPENDIX A (Cont.) 12. Require agenciel operating warehoulel at anyone location of more than 2,000 Iq. ft. with average inventories-2f expendable goodl exceeding $10,000 to maintain stock recordl of expendabl~ds and to conduct annual phYlical inventorie~. Facilitiel of the size described above reprelent what the study team believes to be the lmallest practical unit for which unit stock records can be economically maintained. Typically, lmaller units do not have the capabilitiel for required record keeping and are supplied from larger warehouse facilities capable of maintaining overall stock records. There are 216 unitl of the capacity described above which should main- tain baSic stock recordl. 13. Utilize the ADP sYltem eltablilhed to manage the Department of Ge~ Service I Central Stores inventoriel to Itore and report basic data~ shipmentl to point-of-use warehousel both from the Department of General Services Central Stores and other suppliers. While a complete inventory control system for all State expendable goods inventories is probably prohibitively costly, baSic data easily drawn from shipmentl by Central Stores and purchases made from suppliers by the Office of Procurement for delivery to point-of-use warehouses will provide adequate control data on inventories not directly managed by the Department of General Servicel. This data, in conjunction with regular by-product reports from annual physical inventoriel, will per- mit the Department of General Services to oversee and control expend- able goods inventories throughout the State. 14. Require agencies maintaining point-of-ule inventories to claSSify items stocked as either "contingency" stock or "regular expendable" stock and to record the individual or unit to whom "contingency" iteml are charge- able. Most point-of-ule inventories contain stock items which are maintained al insurance against serious emergency needl for which immediate replen- ilhment is required (i.e. critical electrical, plumbing, and communica- tion parts, firefighting suppliel, etc.). Such iteml should be largely exempt from general inventory Itandardl derived from usage history. To prevent the arbitrary and uneconomic overstocking of such items or the improper clalsification of iteml as "contingency", however t agencies must identify which person or unit il relponsible for this portion of the inventory investment and be required to periodically review the validity of the management deciSion to maintain luch stock without regard to ownerlhip COlt. Such Itock clallification greatly expeditel auditing of inventory inveltment and control procedures. 15. Require agenciel to annually report to the Department of General Servicel, Office of Procurement, all expendable goods regularly maintained in con- tinuoul inventory by clallification, commodity description, value and approximate annual usage. Information on inventories maintained by agencies, including the usage hiltory of luch iteml, will permit the periodic review of overall State inventory investment and the identification of repetitively used items suitable for contract purchase or inclusion in a central warehousing program. Such information Ihould be made a regular by-product of regular physical inventoriel. 16. Eltablilh general standardl for audit of unit stock records. Expendable stock Ihould turn over at lealt 3.0 times annually. Stock with lesl active usage should either be purchaled in smaller quantitiel, purchased leasonally (if ulage il sealonal) or Ihould not be stored at APPENDIX A (Cont.) all. Periodic field audits should be made to determine if inactive, ob.olete or excessive stocks are being maintained. Such an audit review can be included in the regular Department of Finance audit or internal department audition activity but will require lampling audit by the Department of General Service.. Exhibit VIII, Outline of Basic State Inventory Management Policy, contain. such auditable standard •• 17. Establi.h, in the Department of General Services, Office of Procurement, sufficient .taff capabil!!I-in inventory man!8ement to (1) effectivell manage the Department of_General Services oeerated central warehousing !rograms_(2) recommend to the Director Itat!!!de inventory maD!gem!~~ ~liciel and standards (3) condu~eriod!~_fiel~~~dits_~f a8!~~ ~!!:!ted warehous~er08rams and ~L _a88iB~-.!!~ie!..J..~ incr~~si1!8 the effectiveness of their ~~~~tory man!8~-!nt. Nowhere in State government is there any organization specifically responsible for, or sufficiently expert to advise on statewide inventory management particularly as this field relates to activities such as purchasing, traffic, transportation and warehousing. Clearly all of the.e areas of State's business activity ar~ within the scope of the Department of General Services' interest. Private industry hal long recognized that effective management of its inventory operations is one key to economies in operation and have developed staff capability to achieve it. The Federal Government has, in both its military and _ civilian operations, developed major inventory management programs. For example, in the San Francisco regional office of G.S.A., nearly 251 of the staff assigned to that office are in its inventory control activity (as distinguished from its purchasing, warehousing and quality control department). Such a basic unit is recommended in the Governor's Task Force and initial first phase staffing is contained in the recent Office of Procurement reorganization plan. 18. Establish standards for and maintain a master record of State warehouse f aci 11 ties • ---------- The study team found no central record of the State's capital investment in warehouses and related facilities nor did it encounter any policies or standards covering the expenditure of funds for such facilities. The .tudy team strongly recommends that the Department of General Services, Facilities Planning Division or other appropriate unit, utilize the data gathered for this report to establish and maintain such a master record. We further recommend that warehOUSing space, manpower and utilization .tandards evolved from the re-engineering of the Department of General Services, Central Stores warehouses, as recommended in #3 above, be expanded into statewide standards which can be used both for audit of existing facilities and to assess agency request. for additional storage fac 11 it ies. 19. Reduce and consolidate distr!ct~~e wareh~~!ing operated~l_~~!!~agen~ies. Within several large agencies such as Division of Highways, Forestry, Fish and Game, Parks and Recreation and Water Resources a special prob- lem has been created by the geographic organization of these agencies. The problem is beat described as "stepped warehousing" in which the agency divides the State into regions or districts and establishes within each self-contained warehousing systems, operating largely independently of both other warehousing systems within the same agency and similar warehousing systems operated by other agencies. -16- APPENDIX A (Cont.) Ttae principal criticil.1 the Itudy te81ll hal of luch lituationl are: 1. Patterning warehouling and diltribution IYlteml around geographic divilionl of work doel not relult in economic or effective inven- tory management. While it may be necellary. for example. to divide the State in 12 highway di.trict. it doe. not follow that required warehouling and di.tribution requirel 12 independently operating warehou.el. 2.. Delpite differencel in program million. of individual agencie., many .uch "diltrict" type Itorage facilities tend to cluster at the .ame pointl. It i. not unulual to find, within one Imall area, .everal "di.trict" Itorage facilities operated by leveral agencies functioning almo.t completely independently. Stocks in these ware- houle. are, at lealt in part, duplicate iteml and the aggregate Iquare footage. manpower and equipment utilized substantially exceedl that which would be required by a con.olidated facility. Some examples of such concentration of independent storage facilities within single Imall cities are: Bilhop Forestry 4.710 Iq. ft. Fish & Game 5.320 • q. ft. Highways 7 z880 s9..:._ft • 17,910 sq. ft. Eureka --- Highways 12.292 Iq. ft. Parkl & Rec. 2.738 sq. ft. Fish & Game 777 sg. ft. 15.807 sq. ft. Red Bluff Fish & Game 2.000 Iq. ft. Forestry 8.420 aq. ft. Water Relources 9.300 .g. ft. 19,720 sq. ft. Redding Fish & Game 7,760 sq. ft. Foreatry 18,070 sq. ft. Highways .2..&16 Ig. ft • 33.646 sq. ft. San Bernardino --- Foreltry HighwaYI General Services ~an L~is Obi!~ Forestry HighwaYI Stockton Agricul ture Highways General Servicea 3.520 sq. ft. 8.236 Iq • ft. 22340 ag. ft. 14,096 sq. ft. 2.310 sq. ft. 21 z 989 !9~ 24,299 sq. ft. 1,250 aq. ft. 9.670 sq. ft. lz634 Ig. ft. 12,554 Iq. ft. We mUlt recognize that many of thele facilitiel are associated with gen- eral purpole inltallation and complete elimination of independent storage activitiel in favor of conlolidated facilitiel il not fealible. We do. however. believe, that (1) more district type facilitiel have been establbhed than are actually required becaule of the "self- contained diltrict" organizational concept and (2) jOintly housed and operated faciiiti •• in .uch area. a. Bi.hop, Eureka. Red Bluff, Redding, San Bernardino and San Luil Obilpo. under the management of the largelt tenant. could materially reduce inventory management cost. -17- APPENDIX A (Cont.) Agencie. operating di.trict facilitie •• hould be required to explore method. of .haring .pace and con.olidating inventories. tn addition, the agencie •• hould be required to thoroughly re- evaluate their .elf-contained di.trict warehou.ing program. and con.olidate facilitie. into regional systems capable of multi- district ,upply ,upport. Exhibit IV li.ts all State .torage facilities identified by this .tudy u.ed for expendable good. inventorie. and clearly reflect. this overlapping .upply and distribution .y.tem problem. -18- Agency Administrators Deparo.ent Directors SUGGESTED EXECUTIVE LETTER APPENDIX A (Cont.) EXHIBIT III Recently completed task force studies indicate that some State agencies are maintaining inventories of expendable goods in uneconomically large quantities. This relults not only in an unnecessarily large amount of State funds con- tinuously tied up in such inventories but also requires large continuing expenditures for storage facilities, staff and equipment. I have, therefore, instructed the Director of the Department of General Services to immediately initiate a continuing statewide program to reduce such inventories and related operating costs and to establish effective manage- ment standards and policies governing such inventory investments. As such programs and standards become operative, the management of individual departments must reduce or eliminate all possible items from continuing inven- tory .torage and consolidate or eliminate unneeded storage and distribution programs. -20- Ronald Reagan Governor • APPENDIX A (Cont.) EXHIBIT IV SUGGESTED MANAGEMENT MEMO to: All State Agencie. SUBJECT: Expendable Goodl Inventoriel The Governor'l Executive Letter , requirel all departmentl to elim- inate unnece.lary expendable goodl inventoriel. To achieve thil, the fol- lowing action. are required: 1. All department. mu.t review exi.ting inventories of expendable good. and identify .urplul Itock. Por purposel of thil review, .tock exceeding a normal 60 day .upply .hould be conlidered lurplus to immediate need. with the exception of (a) item. readily available from lupply lourcel (b) continaency .tock maintained for emergency needs involving public health, welfare or .afety or (c) item. which must be accepted in large lingle deliverie. to conform to market practice or to achieve .ignificant unit co.t .aving •• 2. Purcha.e. of expendable good I for which lurplu. exiltl mu,t be deferred until luch .urplu. i. conlumed. Departmentl mu.t report to the Office of Procurement .urplu. expendable item. lui table for ule by and available for .ale or tran.fer to other State departmentl. Department. which have not conducted a phy.ical inventory of expendable inventorial within the preceding 12 month •• hould do 10 in determining the appropriatenell of inventory quanti tie •• 3. Effective , all purchale eltimate., Form 66, lubmitted to the Office of Procurement for repetitively uled expendable goodl (except .ub.i.tence and related commoditiel) which are or will be maintained in continuing inventory Itorage prior to con.umption, mUlt contain the following: A. Anticipated requirement. for a period of at lea.t 6, and preferab!I 12 monthl and fundi adequate for anticipated purcha.e. durin&-! comparable period. Where inadequate data i. avilable to project anticipated ulage of all item. within a general clasl of expendable goods (maintenance, labora- tory, photographic lupplie., etc.) agenciel may lelect the individual item. repetitively uled in the largeet quantities and include eetimatee of anticipated u.age of theee benchmark items. Ulage of remaining item. within the lame general claee of goods may be estimated in terme of total dollarl for the period. B. Minimum deliverl lead time r~quired (interval between-placing of order and receipt of good.). All luch required delivery lead timel muet be Itated a. either (a) contingency stock maintained for emergency ule involving public health, welfare or lafety or (b) not leel than 3 daye (longer intervale may be epecified 1f acceptable). -21- APPENDIX A (Cont.) Purchale elti .. tel for contingency Itock mUlt be approved by the depart.ent director, college prelident or chief financial officer of the ordering organization and be accompanied by a description of the .. ergency need anticipated, the probable consequence of delay in obtaining the it .. 1 and the maximum quentity normally required by such .. ergenciel. Such expendable goodl purchase elti .. tes will be accepted by the Office of Procurement as authority to establish local purchase con- tractl with suppliers able to provide required expendable goods within the Ipecified delivery lead time. Local purchase contracts will provide for direct ordering by the State agency under predetermined pricel or discounts from the supplier by lub-purchale order and, except for contingency stocks, in quantitiel not exceeding a normal 30 day supply. Ageneiel will use luch contracts with the Itipulation that on-hand inventoriel of expendable goods, other than contingency stocks, covered by the contract will be reduced to a 30 day lupply or lell or, if pOlsible, completely eliminated. c. Alenciel .. y specify. for inclulion in the purchale contract, informa- tion to the lupplier on authorization to place orderl, inVOicing, delivery inatructionl, etc. Ageneies are encouraged to adopt the limp lest and mOlt direct method pOllibie for placing orders and paying invoices under such contracts. Unnecellary reviews, approvals, documentation and other delays will negate much of the value of such rapid Itock replenishment contractl. -22- · · • APPENDIX A (Cant.) EXHIBIT V RECOMMENDED SAM REVISION ORDERING SUPPLIES FROM STORES 3543 Requisitions for Stores stock items are submitted only on Form 116, !~ Order. (Sub-purchase order forms will not be used for ordering of Stores stock.) All supply orders, regardless of area of origin, should be forwarded to the Central Stores Manager, P.O. Box 20191, Sacramento 20. All supply orders must indicate the catalog stock item numbers in the space provided on Form 116. Delivery addresses shown on Form 116 must be the facility nearest the point of use capable of accepting shipments. Agencies may not order delivery of supplies from Stores to intermediate warehouses for redistribution to other locations. While agencies are encouraged to order supplies as infrequently as practical, those agencies located in buildings with limited storage space should order supplies delivered directly to those buildings in whatever quan- tities that can be conveniently handled. List prices of Stores supplies include freight, therefore, no additional cost to agencies results from increasing the frequency and decreaSing quantities of orders to conform to available space at the point of use. CENTRAL STORES CATALOG AND PRICE LIST 3544 Stores issues a catalog and interim revisions listing and describing all available stock items and providing information necessary for requiSitioning commodities from Stores stock. Periodically, Stores issues a supplemental price list for agency information and, on a more frequent schedule. a bulletin containing information about new products, product uses, changes in procedure. etc. List prices are F.O.B. destination and freight on all shipments are pre- paid by Central Stores regardless of destination within the State. -23- SACRAMENTO REDISTRIBUTION WAREHOUSE LINE ITEMS ANALYSIS Coaaodity EMPLOYMENT EQUALIZATION FORESTRY ! Total I Total Total Total Percent Total Total Percent Percent Line Items Items Line Items Items Line Items Items Items cIs Dupli- Items cIs Dupli- Items cIs Dupli- cated cated cated Forma 1625 47 2.9 600 100 16.6 335 35 10.4 Janitorial Supplies 78 33 42.3 10 10 100 84 42 50 Office Suppliea 782 424 54.2 600 590 98.3 175 175 100 Hancltoola 1 120 Medical Supplies 29 24 Automotive Supplies 19 5 26.5 Other Misc. 180 198 16 8.1 Total 2515 504 20.1 1390 700 50.4 955 273 28.6 ---- ~ Total cIs 't Total cIs X Total cIs 1 Whse. Sq.Ft. Dupli- Whse. Sq.Ft. Dupli- Whse. Sq. Ft. Dupli- Sq.Ft. Used cation Sq.Ft. Used cation Sq.Ft. Used cation Space 32,207 7,118 22.1 10,800 4,374 40.5 9,288 1,393 15 EXHIBIT VI HIGHWAY PATROL I Percent I Total Total Line Items Items : Itema cIs Dupli- cated 500 50 10 170 85 50 700 630 90 6 25 500 28 1929 765 39.6 Total cIs 1 Whse. Sq.Ft. Dupli- Sq. Ft. Used cation 19,980 7,393 37 f • > '"1:1 '"1:1 ~ .... >< > - n o =' ,.. - I N VI • Commodity Forma Janitorial Supplies Office Supplies Handtools Medical Supplies Automotive Supplies Other Misc. Total Space l' SACRAMENTO REDISTRIBUTION WAREHOUSE LINE ITEMS ANALYSIS (Page 2) HIGHWAYS KlTOR VEInCIES SOC IAL WELFARE Total I Total Percent Total' Total 'Percent Total Total I Percent Line Items Item. Line Item. Items Line Item. Item. Items cIs DupU- Items cIs DupU- Items cIs DupU- cated cated cated 500 225 45 1080 11 1 1,776 71 4 I 62 i 6 9.6 86 63 73.2 500 400 80 600 490 81.5 485 422 87 I 100 5 26 I 16 ! : 1 I 1 1 100 I 2,501 81 3.2 91 99 I 2,360 \ 493 3,690 I 712 19.3 1,879 565 30.1 20.9 ------ Total I cIs 't Total CIs 1- Total I cIs 't Whse. I ' Whse. Sq.Ft. Dupli- Dupli- ,Sq. Ft. Dupli- Whse. ISq.Ft. Sq.Ft. I Used : cation Sq.Ft. Used cation Sq.Ft. I, Used cation I I 89,405 21,099123.6 47,940 7,239 15.1 14,500 I 2175 15 I ' WATER RESOURCES Total Total Percent Line Items Items Items cIs Dupli- cated 438 134 30.6 69 59 85.5 1,500 1,200 80 102 46 74 18 24.4 2,229 1,411 63.3 ~---------- Total cIS 't Whse. Sq. Ft. Dupli- Sq. Ft. Used cation' 25,000 7,875 I 31. 5 I I > "'0 "'0 ~ ~ >< > - n o :s " . - INVENTORY REDUCTION ~OCTOBER 1, 1967 , CONTRACT PURCHASES REDUCE ..... LEAD TIME STOCK WAREHOUSING OPERATION RAFFIC - OUTBOUN[ INDUSTRIAL CAPABILITY ENGINEER CONSULTANT ~ SHIP ... ENTS - INCREASE ... HIRE 90 DAYS 48 HOUR SERVICE SERVICE LEVEL , ESTABLISH SPACE AND ... ANPOWER ST ANOAROS, r- OPERATIONAL -y LAYOUT AN~ ORDER PROCESSING PROCEDURE CAPABILITY ---t Ir DEVELOP PROGRAMS EVALUATION AND ACCEPT LD.P. PROGRA ...... ING SYSTE'" TEST E.D.P. SYSTEM ~ I- ~ ~ ~ STATEMENT - "PROFIT SYSTE ... DEVELOP ... ENT AND DESIGN NEEDS SOFT WARE" ,. DEVELOP ... ENT DEBUG , UTILIZE ~YSTE'" ACCEPT NEW l<TorK I HI IS I 9S • INVENTORY HIRE I/e OUTPUT DESIGN INPUT PREP. CODE, MANAGEMENT SUPERVISOR AND 1-+ REPORTS. INQUIRY. ~ DESCRIBE HISTORY. CAPABILITY I C ANALYST UDIT TRAIL, INVOICE FACTORS ESTIMATED 1 I 3 4 5 i I i 9 MONTHS I I l I I REQUIRED DEPARTMENT OF GENERAL SERVICES INVENTORY MANAGEMENT f4:JUL Y 1, 1967 .A V ~ INTEGRATE BLDG. vL. INTEGRATE AND ~ ~ROUNDSINVENTORI RE ... AINDER OF' D.G.S. INVENTORY INTO SYSTE ... ,0 11 1{ 13 I I i • L R'Wl~W&yl~ON CONSOLIDATION ~ . DEPART ... ENT OF' WATER RESOURCES WHSE > ~ ~ ~ .... >< > m X :r- -(") ~O -i::s <rt = . - 1t 1t 1j r . , ... APPENDIX A (Cont.) EXHIBIT VIII OUTLINE OF BASIC STATEWIDE INVENTORY MANAGEMENT POLICY - EXPENDABLE PROPERTY I General Policy A. The Department of General Services will function as the central ware- housing organization for all State agency requiremen~s of repetitively used expendahle items. Agencies may maintain continuing inventories of expendable items only at the point of use of such items. Except in storage facilities at or near the point of use, agencies may not dupli- cate inventories of expendable goods maintained by the Department of General Services, Central Stores, or operate warehousing facilities for this purpole. B. Agencies are responsible and accountable for their continuing investment in expendable property inventories and for operatin,~ costs generated by the continuing maintenance of such inventories. Such inventories and . operating costs shall be no greater than is actually required or economi- cally justified and will be subject to periodic audit to assure that individual agency managers have regularly and effectively maintained such inventories and related operating costs at the lowest practical level. C. Expendable items will be maintained in continui~g inventory storage only where such items are required for emergency needs involving public health, welfare or safety, are not readily available from supplier inventories or, because of their specialized nature, must be accepted in large single shipments to achieve maximum net savings or conform to market practice. The Department of General Services, Office of Procurement, will be respon- sible for establishing effective purchase methods for expendable items which provide means to reduce the quantity and type of expendable items in State inventories. The Office of Procurement will also be responsible to recommend policies and procedures to reduce the State's expendable inven- tories investment, review agency inventory control practices and recom- mend to agencies actions to achieve more effective inventory management. A. Agencies will maintain such unit stock records as are required to permit (1) management analysis of probable future needs for expendable items (2) identification and reporting of the value and content of such con- tinuing inventory and (3) the reconciliation of periodic physical inven- tories of such items • B. Agencies will annually report to the Department of General Services, Office of Procurement, all expendable items maintained in continuing inventory in anyone location in quantities averaging $100 or more during the previous 12 months, except those items obtained from the Department -27- APPENDIX A (Cont.) of General Services, Central Stores. Such reports will show for each item, the description, location, source of supply, last unit price paid and total quantity used for the period. C. Expendable items maintained in continuing inventory will be classified by stock categories indicating the purposes for which they are stored to permit the reporting of inventory information in terms directly related to the program mission of the agency. Such categories must be designed to clearly show which agency sub-program needs are creating these inventory costs and the specific program function to which such continuing inventory costs should be related. Continuing management review must be given to contingency .tock. maintained to meet emergency needs involving public health, welfare or safety to assure that the most economic and effective methods are employed to meet such emergencies. Program managers ordering that such stocks be held in stock must be made aware of, and periodically required to review and justify the continuing cost of maintaining such inventories. D. Agencies shall, within the general framework of this policy, develop and establish internal policies and procedures to control and minimize inventory investment and related operating costs. Such policies and procedures must contain at least the following: 1. Specific assignment of management responsibility for effective inventory control of both agency wide level and within each organi- zational unit which maintains continuing inventories of expendable goods. 2. Policies and procedures governing the size and scope of continuing inventory investment, criteria for establishing stock levels, methods for generating control data for management of inventory investment and operating costs; .tandard. for utilization of storage space and related manpower and equipment and procedures for periodic manage- ment review of inventory control effectiveness. 3. Procedures for generating and reporting to the Department of General Services, Office of Procurement, information on expendable property requirements necessary for the effective consolidated purchase of such items. -28- COST-SAVI~GS ANALYSIS ~ '10 MilliON ~ 30 1'1.11.01'1 £ ~O MillION 3 () 0: ... --'--.l.. .i t .0 ~ ting MIll icN \ \ \ \ \ ~ S "" 1111 oN (/) .w ,? '1 MILi.ot..i 7~ (/" : 3 :w1dIlOJ.i > ~ L~ :2 tf\1I1 j~tv <1l ..... CJ c:: () c.; tv \.0 MI' ho ... , ..... 110104 1 year Z vears 3 years ;z. ,"1\ I '-" i~, .. So f3 _ Q.p c.r at i l!.\' c~s t.,s _ --- '~t1O,OCO 4 v~ars 'I- ('1\111, oN I ,,-;-U;OH - - ~, .. EXHIBIT IX > '"d '"d ts:I 2: t:I I-t >< > --n o :s ~ - ~ )' / ~. .' o l\, \ \ \" \ . , -.'. " •• . , • ''I . \., '.: ) \ ) \ ) \.." APPENDIX A (Cont.) STATE OF CALIFORNIA STORAGE LOCATIONS • Redistribution VJarehouse . ~, , • point of Use Warehouse (over 2,000 Sq. Ft.) Not Shown Point of Use Storage Facility (under 2,000 Sq. Ft.) TOTAL STORAGE LOCATIONS : . . " .- -~'-, '. \ \ . , ... " San Diego MAPA (16) (216) (1+14) - 646 .I \ I / / San Francisco ------ ----. APPENDIX A (Cont.) MAPB STATE OF CALIFORNIA DUPLICATE ROUTL~G OF SHIPMENT FROJ'.1 EIGHT HEDISTRlBUTION \{lIREHOUSES m SACRAr1ENTO 3-4 RID Warehouses r~ing Shipments to the Same ~2 Cities 5-6 RID Warehouses I'laking Shipments to the Same 2U Cities 7-8 RID \rJarehouses I>1aking Shipments to the Same 19 Cities , " " San Diego ) \:;L.._-------,J APPENDIX B State of California Revenue and Management Agency Memorandum To Mr. John Berke Date February 19, 1970 Commission on California State Government Organization and Economy File No.: : • 11th Bnd L Building, Suite 550 Sacramento, CA 95814 From Department of General Services OFFICE OF PROCUREMENT-Sacramento Subject: Per your phone request, here is a current list of the State Office of Procurement's annual purchases by broad commodity groupings: . , • Commodity Electrical Equipment Research & Laboratory Equipment Highway Patrol Vehicles Automotive General Purpose Vehicles and Equipment Food Office Supplies & Stationery Agric. Supplies & Feed Communication & Electronic Equipment Mineral Construction Haterials Office Hachines Furniture Drugs Gasoline & Petroleum All Others TOTALS FEO:kt cc: J. S. Babich R. L. Vance J. Knibb Purchase Orders $ 8,569,000 5,139,000 6,877,000 14,667,000 4,449,000 3,311,000 5,188,000 6,712,000 2,563,000 3,076,000 3,619,000 137,000 23,319,000 $ 87,626,000 Frank E. Oliver Annual Contracts $ 406,000 5,564,000 4,930,000 10,842,000 771 ,000 480,000 961,000 614,000 2,276,000 11,177 ,000 14,353,000 $ 52,374,000 State Procurement Officer